Customer Retention Optimization For SaaS
As SaaS categories become increasingly competitive, customer retention optimization emerges as the key differentiator between thriving and fading companies.
It’s no longer enough to attract new business; the key to sustained success is keeping your existing users engaged and satisfied in the long run.
This is easier said than done. However, with a good product and a combination of the right retention strategies, it’s possible to retain a high percentage of your users.
In this article, we’ll discuss key retention metrics to track and proactive strategies to reduce churn.
- Customer retention is a company’s ability to keep existing customers engaged, satisfied, and loyal over an extended period.
Benefits of customer retention include:
- Higher customer lifetime value and improved bottom line
- Increased upselling opportunities from loyal customers
- Free word of mouth from satisfied customers
- Increased customer loyalty and online reputation
Key customer retention metrics to track:
- Customer retention rate
- Churn rate
- Net promoter score
- Customer satisfaction score
13 Effective customer retention strategies for retaining customers
- Personalize customer experience from the beginning.
- Simplify onboarding with in-app guides and checklists.
- Pair free trials with product demos.
- Collect customer feedback to improve their experience and keep them coming back.
- Boost word-of-mouth marketing and online referrals.
- Implement a customer loyalty program to increase product stickiness.
- Increase customer engagement with gamification.
- Identify and reduce friction with funnel reports.
- Flag dips in customer engagement for key features.
- Improve customer retention by monitoring active users.
- Offer self-service support with knowledge base to improve your repeat customer rate.
- Improve customer service with live chat.
- Understand churn with exit surveys.
What is customer retention?
Customer retention is a company’s ability to keep existing customers engaged, satisfied, and loyal over an extended period.
Retention is especially important for the SaaS model because it depends on continuous renewals to justify customer acquisition cost or CAC and stay profitable.
Why is customer retention optimization important?
It costs more to acquire new customers than to retain existing ones.
A study by Bain & Company found that a 5% increase in customer retention can lead to a 25% increase in profits. The margin can be higher or lower depending on your SaaS category, but you get the gist.
Aside from saving costs, here are a few more benefits of customer retention:
- Higher lifetime value and improved bottom line: Long-term users understand your product’s value and will continue renewing their subscriptions with little to no push, leading to increased LTV and better financial performance for your company.
- Upselling opportunities from loyal customers: Loyal customers are inclined to actively explore and embrace your product’s additional features. They tend to naturally reach the predefined goals for account upgrades, such as a specific monthly usage threshold. Even without upgrade thresholds, loyal users remain a prime audience for upselling and cross-selling because they’ve come to love your tool over time.
- More referrals help with acquiring new customers: Satisfied, loyal customers become your most effective advocates as they’re more likely to recommend your product to their peers and colleagues. Word-of-mouth marketing, driven by customer loyalty, is a powerful tool for acquiring new customers. These referrals often come with built-in trust, making them more likely to convert.
- Increased customer loyalty and online reputation: Loyal customers are less likely to be swayed by competitor offerings and are more forgiving of occasional hiccups. They’re also likely to leave positive reviews and mention you on their social media, boosting your online reputation.
Key customer retention metrics to track
You can’t properly optimize retention if you don’t have a way to regularly track and adjust it based on the data.
This section shows you four retention metrics to measure:
Customer retention rate
The customer retention rate (CRR) is the percentage of customers who continue using your product over a specific period.
To calculate, deduct the number of users you acquired in the period from the number of paying users at the end of the same period. Divide the result by the total number of users in the beginning and multiply by 100.
For example, imagine you want to calculate your CRR for the past 6 months, and you have the following data:
- 300 customers at the beginning of the period
- 50 new customers acquired during the period
- 320 paying customers at the end
Your CRR will be:
([320 –50 ] /300 ) x 100 = 270/300 x 100 = 90%
The churn rate is the opposite of the retention rate. It represents the percentage of customers who stopped using your product within a specific time frame.
To calculate, choose the period you’ll cover, then divide the number of users lost in that period by the number of users at the beginning of the period. Multiply the result by 100.
Suppose a SaaS startup had 500 customers at the beginning of a quarter, and by the end of the quarter, 50 customers had canceled their subscriptions.
In this case, the churn rate will be:
(50 / 500) X 100= 0.1 X 100= 10%
Net Promoter Score
The Net Promoter Score (NPS) measures customer loyalty and advocacy.
It’s calculated by asking customers a single question: “How likely are you to recommend our company to a friend or colleague?”
Customers are then classified as promoters (those who give a score of 9 or 10), passives (those who give a score of 7 or 8), or detractors (those who give a score of 0 to 6).
The NPS is calculated by subtracting the percentage of detractors from the percentage of promoters.
For example, if a company has 30% promoters, 50% passives, and 20% detractors, then its NPS is 10%.
Customer satisfaction score
The CSAT score is a metric that shows a customer’s level of satisfaction and delight with your product or service.
It’s measured by asking customers questions such as “How satisfied are you with our product?” or “How satisfied are you with our customer service?” Customers are then asked to provide their answers on a numeric or Likert scale or using emoticons.
Customer satisfaction score = (total number of satisfied customers/total customers that took the survey) x 100
A good CSAT score for the SaaS industry is around 78%, per the 2023 CSAT benchmarks report by Fullview.
13 Effective customer retention strategies for retaining customers
Not satisfied with your retention rates?
Don’t freak out.
Most SaaS companies struggle to retain users, but with the right customer retention strategy, you’ll boost customer retention and turn ordinary users into loyal customers.
1. Personalize customer experience from the beginning
Customer retention optimization starts from the signup page. Make it super easy for users to get into your tool by implementing single sign-on (SSO).
Once they’re in, use the signup flow to collect user data and learn about their needs and preferences.
You want to ask questions about their roles, company size, and JTBD.
Use the data obtained to personalize their onboarding, pointing them to features most suitable for their primary goal.
2. Simplify onboarding with in-app guides and checklists
Don’t leave users to explore your tool on their own. It will lead to unnecessary friction and eventual churn.
Remember to still personalize the experience—prioritize features that users will find valuable.
3. Pair free trials with product demos
Free trials remove the barrier to entry and make it easy for potential customers to try products with no strings attached.
Product demos can also be helpful, as they allow potential users to see the product in action and learn more about its features and benefits.
By pairing free trials with product demos, you allow users to experience the product in the best possible way. This lowers the learning curve and increases conversion and user engagement.
4. Collect feedback from existing customers to improve their experience
Constantly collect feedback to monitor customer satisfaction and identify friction points.
By addressing customer concerns in time, you improve their experience, make the product more enjoyable, and boost retention.
When collecting customer feedback, deploy both qualitative and quantitative surveys to gain holistic insights into the user experience and know exactly what to work on.
5. Boost word-of-mouth marketing and online referrals
Happy customers don’t mind recommending you to their networks so why not take intentional steps to encourage positive reviews?
Segment your most loyal customers and prompt them to leave a review online.
An effective time to trigger your prompts is immediately after surveys like NPS.
Set an automatic flow that asks NPS promoters to leave you feedback on review sites or invite them to a video interview you could embed on your testimonial page.
By gathering reviews this way, you’ll enhance your online reputation and attract quality referrals. These users tend to stick because they come pre-framed by learning about you from people they know, like, and trust.
6. Implement a customer loyalty program
Loyalty programs incentivize customers to continue doing business with you. These incentives include discounts, points, or other rewards that can be redeemed for something valuable.
Popular types of loyalty programs include:
- Points-based loyalty program: Customers earn points for actions such as account renewals/upgrades, reviews, hitting an engagement milestone, etc. These programs are popular because they’re easy to understand and use.
- Mission-driven loyalty program: This program is built around a central mission or cause that resonates with your company and customers. The program encourages customers to participate in activities that support the mission. People will engage if they feel drawn to your cause.
- Referral programs: These programs incentivize existing customers to refer friends, family, or colleagues to your product. Typically, the existing customer and the referred user both receive rewards. Here’s an example from Dropbox:
7. Increase customer engagement with gamification
Gamification gives users dopamine boosts for completing tasks, which makes them feel good and want to engage more.
In-app gamification can be anything from engagement badges to animations you display when users complete tasks.
Consider the following example from Grammarly. A small, animated figure appears when you write a sentence or paragraph without grammar errors. It gives you a virtual pat on the back as if to say, “Well done!”
This element is a nice way to motivate users and give them a sense of accomplishment. It also subtly encourages users to pass future content through Grammarly and see if the animation will appear.
8. Identify and reduce friction with funnel reports
Sometimes, users will stop engaging with your tool because they encountered challenges, but you’ll be oblivious to this until you check your analytics.
So, regularly use funnel analysis to see how users are progressing through your tool. This practice will help you easily pinpoint where drop-offs occur.
Once spotted, quickly address the issues to improve customer experience and drive retention.
9. Flag dips in customer engagement for key features
Perform trends analysis to see user engagement over a specific period. Study the data to identify sudden drips in engagement and investigate the root cause.
For example, changing your UI or sunsetting a feature could result in a decrease in user engagement. By addressing the problem, you’ll enhance the customer experience and make users happy.
10. Improve customer retention by monitoring active users
Monitor active users to check the impact of your retention efforts. Divide these users into cohorts based on different characteristics so you can get granular insights.
Analyze each cohort to understand its retention rate. Check to see why some cohorts have higher retention rates than others and what you can do to improve.
For example, you might find that users who engage more frequently and consistently tend to stick for longer.
With that information, you could encourage more consistent product usage in the lower retention cohort through targeted messaging, personalized recommendations, and gamification elements.
11. Offer self-service support with an in-app resource center
Self-service support provides users with the resources they need to find solutions to their problems independently.
It empowers them to take control of their learning and problem-solving process. By offering help docs, videos, written tutorials and FAQs, your knowledge base encourages users to engage with the product actively.
To make it work, ensure your support portal contains all the information your users need and is regularly updated.
Also, include a search functionality and arrange the resources properly so users don’t struggle to find answers.
12. Use live chat to resolve user problems faster
Self-serve support works well, but customers will sometimes need to speak with an agent.
Have a live chat for situations like that. This will improve your customer service as users will have issues resolved quickly and without friction.
Just knowing they can always hit the live chat button and discuss their problems will make customers more comfortable using your tool.
13. Understand churn with exit surveys
Churn surveys help you achieve two things:
- Understand the customer’s reason for churning
- Suggest alternatives to canceling and win some users back
Set your exit surveys to trigger automatically when users attempt to cancel their accounts. Ask a simple, multichoice question like the one below:
Provide an alternative to canceling based on the user’s response. For example, if they said your product is too expensive, you could offer a cheaper plan that meets their needs better. If they’re leaving because of a missing feature, suggest integrations that could help offer the same functionality.
By taking this approach, you will prevent many users from churning. Also, you can look at the survey feedback over time and note consistent complaints. Find ways to address them to retain existing users. If too many users complain that a specific feature is missing, it’s probably time to have it on your roadmap.
Go ahead and implement the customer retention strategies that stood out to you in this article.
As you do that, keep in mind that the most important thing when driving retention is to study user behavior. In doing so, you will glean insights that are unique to your company and will help you keep users engaged and satisfied.
Ready to take customer retention optimization to the next level and increase your repeat customer rate? Get a Userpilot Demo now to begin.